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EUR/USD Weakness Limits Dollar's Retreat From Highs

The dollar retreated from 2018 highs but downside was limited amid ongoing weakness in the euro and investor expectations for further U.S. rate hikes.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose by 0.16% to 92.57. The greenback

The dollar remained supported despite retreating from a 2018 high of 92.82, as investors continued to bet on further Federal Reserve rate hikes despite a weaker-than-expected jobs report on Friday.

The U.S. economy created 164,000 in April, missing economists’ forecast for 189,000 new jobs. The jobless rate fell to 3.9%, while average hourly earnings grew 0.1%.

Tighter labor markets, however, are expected to eventually lead to sustained wage growth, pushing inflation above the Fed’s 2% target.

Atlanta Fed President Raphael Bostic said on Monday he is comfortable with “some overshoot” of inflation and reiterated his view for two further rate hikes this year.

The dollar has gained more than 4% so far this year but has limited room for further upsides, analysts at ING warned, citing “structural forces.”

ING said it remained convinced that by the end of the year - and into 2019 – “structural forces” will drive the dollar to levels weaker than where it currently trades.

This comes as the bank highlighted the divergence between US growth and interest rates compared to the rest of the world as one of the factors for the dollar rally. This economic divergence, however, is nearing its peak, the bank said, limiting the potential upside in the dollar.

Weakness in EUR/USD limited downside momentum in the greenback as the currency pair fell 0.29% to $1.1926, after German factory orders fell short of economists’ forecasts.

The softer German factory orders added to the recent raft of weaker Eurozone economic data, forcing traders to trim their bets on the European Central Bank unwinding monetary policy stimulus sooner rather than later.

GBP/USD rose 0.22% to $1.3561 on lighter volumes amid a bank holiday in the UK.

USD/JPY fell 0.03% to 109.09, while USD/CAD rose 0.03% to C$1.2849. The latter pair was limited by an ongoing rally in oil prices – supporting the Canadian dollar – amid growing expectations that US President Trump will decide on May 12 to withdraw the U.S. from the Iran nuclear deal.

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